Ukraine gas talks hit stumbling block

Russia and Ukraine have once again failed to agree on the resumption of gas supplies, after Gazprom dismissed an EU proposal for a European intermediary be introduced to the supply chain to manage payments.

The European Union-mediated gas negotiations between Russia
and Ukraine have broken down once again, despite apparent progress being made
in talks last week. According to Moscow, the main reason behind the breakdown is
Brussels’ inability to find $1.6 billion for Kiev to make an advance payment to
Russian gas giant Gazprom.

A week ago, following talks with German Chancellor Angela
Merkel and French President Francois Hollande, Russian President Vladimir Putin
said that the Europeans might pay off Ukraine’s gas debt by issuing a bridge
loan or organizing guarantees from the European Central Bank. However, not a
single EU official has yet confirmed that Europe is considering this option.

European Commissioner Gunther Oettinger, meanwhile, has
made it clear that Ukraine needs to find the money itself by using the macroeconomic
aid already provided by the EU. “We will do everything we can in the next few
days so that our Ukrainian friends find the specific amount that can be used to
pay for gas,” the European official said.

Kiev is listing other reasons for the failed negotiations.
According to Ukrainian Energy Minister Yuriy Prodan, Gazprom is refusing to
provide legal guarantees that the price will remain unchanged at $385 per 1,000
cubic meters and that the volume will be no less than 400 billion cubic meters
until March 31, 2015. According to Kommersant, Gazprom
interprets these demands as a ploy to weaken the monopoly’s position in the
Stockholm Court of Arbitration.

EU suggests intermediary option

The EU sees a company intermediary between Gazprom and
Naftogaz as a potential way out. “We proposed the following: If Naftogaz is
unable to pay, a European company can take on payment for this gas and later
resell it to Naftogaz,” Oettinger said. “It is also not ruled out that payment
for the transit of Russian gas could be used for payment [for supplies to
Ukraine],” he added. According to Kommersant, this proposal originated in Kiev
and was part of the EU’s and Ukraine’s negotiating position after consultations
between Oettinger and Prime Minister Arseniy Yatsenyuk on Oct. 20.

“The main reason behind the need for a European
intermediary is that Gazprom doesn’t want to include a point in the contract
about responsibility for failure to supply fuel and penalties for it,” a source
at the Ukrainian Energy Ministry told Kommersant. According to him, Kiev is
worried that Gazprom will not be flexible in boosting supplies if there is a
sharp drop in temperature, which could lead to disruptions in gas supplies in
Ukraine since “there is a minimum of gas in storage in the country” and it will
be difficult to completely cover peak consumption.

A source familiar with the European Commission’s position
added that the Europeans are afraid to give money directly to Naftogaz: “The
company is not transparent. There is an enormous amount of cross-subsidizing
and a low level of consumer payment. It is unclear how to track it, where the
money goes,” the source said.

Gazprom turns down proposal

On Oct. 22, Russian Energy Minister Alexander Novak said
that French company GDF Suez had been suggested as an intermediary. The company
declined to comment.

Russian-Ukrainian gas relations have almost always been
maintained through an intermediary scheme. At the beginning of the 2000s,
Central Asian gas was delivered to Ukraine by Itera, which was later replaced
by Swiss trader Rosukrenergo. The intermediary was eliminated with the 2009
signing of the current contract between Gazprom and Naftogaz.

However, Gazprom’s reaction to the idea of an intermediary
was openly hostile this time. Russia is not considering the option of hiring a
European intermediary that would buy gas on the Russian-Ukrainian border,
Gazprom CEO Alexei Miller said.

“Ukraine would benefit from an intermediary because the
latter would shoulder all the risks of working with Gazprom, and Gazprom would
no longer be able to persuade Naftogaz to sign a disadvantageous contract,” said
Yuriy Korolchuk from Ukraine’s Institute for Energy Strategy. According to him,
a European company like GDF Suez would be less susceptible to pressure from
Gazprom and would be able to adopt a tougher negotiating stance.

Another round of talks is scheduled for Oct.
29. However, the current European Commission team’s mandate expires on Oct. 31. This means that Oettinger, who has been European
Commissioner for nearly a decade, will be replaced by a newcomer. His successor
is likely to need time to be brought up to speed on the negotiations, which
could drag out the talks even longer.

Meanwhile, for Naftogaz the heating season has de facto
already begun. On Oct. 20, gas removal from underground storage facilities exceeded
gas input. As they stand now, Ukraine’s reserves in storage allow it to relax only
until the New Year.